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We live, it seems, in particularly trying times of multiple and simultaneous “acts of God.” No sooner had the Angat Dam water level gone dangerously low causing water interruptions than the African Swine Fever decimated our hogs, the Taal volcano erupted, and the coronavirus pandemic exploded disrupting lives, livelihoods, and property. Acts of God happen but we can’t say exactly when and where. And when they come calling, they wantonly lay waste to everything along the way. As a society, we are forced to take draconian measures (lockdowns, evacuations, livestock culling) and to hope we can wait out their ravages. In those times, we draw upon the reserves we built in calmer times. These reserves serve as the ramparts that stand between us and extinction. Our “resilience” is, in other words, anchored on those fateful reserves.
One of the bright spots of the economy under Duterte is said to be the rise in the investment ratio. In the last three years (2017-2019), the average proportion of investment to GDP approached 30%. Compare this with the previous six-year period (2011-2016) when the same ratio averaged 22%.
About two weeks ago, President Rodrigo R. Duterte, in an interview with Ted Failon from ABS-CBN, said that he will sign an executive order imposing a limit on the prices of certain medicines. “That’s good for the Filipino, reduced prices or maintaining a price. I will even sign the document twice over,” the President said.
It’s becoming ever more clear that our dysfunctional, weak, inefficient, and corrupt bureaucracy is a binding constraint to growth and development. It belongs up there together with our low agricultural productivity, labor rigidities, and monopolies in strategic industries as major constraints for the country to attain its true growth potential.
Time was when the Philippines held the dubious distinction of being a “Latin American country in the East.” Its growth episodes were short and spasmodic; “boom and bust” aptly describes its longer horizon; investment was at a canter; its till was perennially made empty by waste and venality; and government encroached into the market mindlessly. That was also Latin America Post-WWII. The current development tragedy, Venezuela, is the latest and most virulent example of the Latin American disease presided over most times by populist caudillos who supplanted the imperfect market with their own populist-socialist mishmash.
A new year is typically the time to turn a new leaf -- but maybe not before past accounts have been settled. While the administration has earned plaudits from some quarters for the economy’s performance under its watch (which, to be honest, could have been better), nagging questions continue regarding the social, civil, and human cost accompanying that success. Was it a vital component, even “a necessary evil” in the words of one economic manager? Or was it a purely incidental and gratuitous -- and lethal -- diversion? In other words, would the economy and society have prospered anyway without a mounting pile of bodies (more than 7,000 drug suspects to date)?
The President unleashed a torrent of expletives on the two Metro Manila water concessionaires for supposedly “onerous” contracts. I tried to understand why. After all, this major privatization, undertaken in 1997 during the Ramos administration to respond to a water crisis, was a celebrated case of a working public private partnership and was awarded multiple times for the transparency and design of the bid process and for its success in addressing the core problem of poor water services provision, especially its inclusive business model of connecting millions of poor communities. The concession agreements were subsequently extended during the Arroyo term in recognition of this success and in order to enable more investments in water and sewerage services to be done, pursuant to the Clean Water Act.
We are ending the last quarter of the year, which is our main harvest season and when palay prices are seasonally at their lowest. Farm prices had fallen at an unprecedented rate since the 1970s during this quarter. Surely, the combined effects of the harvest season and rice import liberalization have caused the decline of palay prices and farm incomes. Have they bottomed out, or are they still falling even now in the major rice producing areas?
On Nov. 7, during the Atlas Network’s Freedom Dinner at the Intrepid Sea, Air, and Space Museum in New York City, the Foundation for Economic Freedom, of which I’m President and co-Founder, received the prestigious Templeton Freedom Award. The Award was given in recognition of the Foundation’s work advocating and successfully pushing for legislation removing Commonwealth-era restrictions on agricultural patents, thereby immediately benefiting 2.5 million farmers and energizing the rural land market.
There is no question that the Philippines needs a boost to its dismal investment rate (22-24% of GDP while our neighbors are punching at 25-35%). But the question is how? The government’s Corporate Income Tax and Incentive Rationalization Act (CITIRA) claims that a lower statutory corporate income tax has to be part of the mix! The subsequent strident debate on CITIRA mostly centers on how the replacement of gross income tax (GIT) at 5% with a corporate income tax (CIT) will impact locators and foreign investment in PEZA, the source of most of our manufactured exports. But truth to tell, this replacement issue, as important as it is, is a derivative one. While overstaying incentives are a legitimate issue, the major prior reason for the restructuring of PEZA incentives -- including the replacement of gross with corporate income tax for locators -- is to plug the potential fiscal hole punched by the proposed lowering of the statutory corporate income tax (CIT) rate from 30% to 20%. The crucial claim is that lower statutory CIT will boost investment and growth -- a claim, mind you, that is by contrast largely glossed over. Surely, the Department of Finance (DoF) team must have this issue well-covered. But merely pointing to the lower average CIT in our Asian neighborhood (average 20% today), where the investment rate today is higher, is no proof that higher investment rate will result in the Philippines. In 1980s when they were making their move, Malaysia’s and Singapore’s CIT was at 40% while Indonesia’s was at 35%. Nor does it suffice to point to Sweden’s and Denmark’s corporate income tax at 22% in 2019, since Sweden’s was at 60% in 1989 and Denmark’s was at 50% in 1985. A cursory check of the evidence seemed in order if only to confirm the claim.
Most of the analysis done on the impact of the rice tariffication law make use of fairly recent data, as in what happened to rice imports, palay and rice prices in 2019. It may be useful to look slightly farther back, say in the last 10 to 15 years. Had the changes observed this year been unprecedented? If they had occurred before, the chances of our rice farmers, millers, and traders surviving what would seem now to be extremely adverse situation for the industry are high.
Most affluent western societies consider themselves “open societies.” Open societies swear by the values of inclusion in diversity. They shun apartheid or unequal access to social benefits based on race, color, or religion. A central tenet is the celebration of the individual over the group and of the ruled over the ruler embodied in one-man-one-vote. Open borders celebrate the fundamental right of its citizens to opt out or opt in. In the roaring 21st century, most opt in. The most envied of open societies because they are affluent and happiest by many measures, are the Scandinavian countries. Have they found the formula to render the baser human instincts recessive? Have they found the philosopher’s stone on the sustainable marriage of openness and affluence?
Felix Mendelssohn invented the genre Songs Without Words (Lieder ohne Worte), short instrumental pieces that were almost singable but contained no lyrics. Mendelssohn objected to a friend’s attempt to “put words” to them, since for him the meaning of the pieces was already crystal clear. He was right. In fact, a good deal of the power of classical music is that -- like abstract paintings -- the listener is left free to impute her own meaning to the piece.
Congratulations are due to House Speaker Alan Peter Cayetano and Ways and Means Chair Joey Salceda on the swift passage of the Corporate Income Tax and Incentive Rationalization Act and Passive Income and Financial Intermediary Taxation Act in the House of Representatives. Memorably tagged CITIRA and PIFITA by Congresman Joey, it is now being heard in the Senate Ways and Means Committee which is most ably chaired by lawyer and economist Senator Pia Cayetano.
Public support is shifting from rice consumers in 2018 to rice farmers this year. Last year, the country’s inflation rate breached Central Bank’s upper band. Analysts blamed that on rice price inflation, which carries among the largest weight in the consumer’s price index.
Every summer, when the sun is beating down hard on the archipelago and dam water levels are low, a familiar visitor comes a-calling in the islands. Its name: Red Alert. It comes mostly in mid-afternoons and early evenings. Its message: be forearmed for a power outage is nigh. And when in some areas the warning blows real, economic activity slows down or stops altogether. With some untimely equipment failures, brownouts envelope more areas and a power crisis is declared, followed by the familiar howl and congressional hearings.
The recent alarm over falling rice prices after import-quotas were replaced by tariffs points up a larger problem that will increasingly confront Philippine society -- the conflict between the interests of a growing middle class and poorer minorities. On the one hand, the historic measure produced its intended effect: it has lowered rice prices, bringing relief to the large, mostly urban rice-consuming public. (After the avoidable fiasco of 2018, inflation is now a record low of 1.7%.) On the other hand, the same measure has wreaked havoc on the livelihood of rice farmers and landless farm workers, who count as some of the poorest Filipinos. To be sure, the government purports to ameliorate the damage. But the one-time loan it offers to rice farmers is obviously not enough to facilitate the permanent shift -- in crops, technologies, mindsets, and occupations -- that the new trade-regime imposes.
So how do we get from our estimate of 6% to government’s 7-8% growth target? I would describe 7-8% as aspirational, considering especially the current global trade environment that has dampened export growth. Although we said Build, Build, Build will add to domestic demand growth, there is high import leakage (40-60% per IMF). An example is cement where imports have grown by a Compound annual growth rate (CAGR) of 30% in the last three years. Also, as we said, all the building activity will aggravate strains on traffic, logistics, and power supply, not to mention that manufacturing plants have been operating at over 80% capacity for some time now.
ON July 23, my colleague Christine Tang and I were asked by GlobalSource Partners New York* to do a teleconference call with our international subscribers on the topic in the headline. I am pleased to share with readers the transcript of that call. Apologies, this will have to be in two parts. The second installment will be on the risks to this cautiously optimistic scenario, and some political analysis -- what the President will likely do with his abundant political capital and the odds of policy continuity post 2022.
Manila Mayor Isko Moreno has been rightly hailed for reclaiming public space by removing illegal vendors plying their trade by occupying streets and sidewalks. However, some critics have pointed out that these vendors are merely trying to earn a living and would suffer tremendously if they were removed or relocated.
Calls for the review of the rice tariffication law at this point are premature as it has been less than a year since it started being implemented. Farmers have yet to receive the assistance which the rice competitiveness enhancement fund (RCEF) offers. Agriculture secretary William D. Dar had just assumed his post, pledging to implement the law effectively. I don’t see any evidence at this point that the lawmakers of the 17th Congress made a big mistake passing this law.
In the May 2019 elections, the Filipino people, it appears, reaffirmed its faith in Dutertismo -- an attenuated political space in exchange for expanded economic space. Having now control of both Houses of Congress, Duterte can no longer blame oppositionist obstructionism for the lack of progress in the economic space. At the start of his watch he promised to leave the management of the economy to his economic team who has sworn by the market. Everyone knows that the boundary between the economics and politics is very porous and artificial. For the most part, he has honored his promise in the past three years. How will this apparent lurch into autocracy affect Duterte’s balancing act between the market and his populism?
Aside from its share of the global market, the second portent of China’s inevitable rise is the rapid growth of its science and technology (S&T) capabilities. To be sure, China’s S&T is still nowhere as established or prestigious as that of the US or Europe. As proof: there has still been only one entirely home-grown Mainland Chinese Nobel Prize-winner in science -- Tu Youyou, a female scientist who established scientifically the effectiveness of a traditional cure for malaria. Significant and helpful but hardly the stuff of cutting-edge innovation.
THE last task undertaken by the famous economist John Maynard Keynes was to secure a huge bilateral loan (around $50 billion in today’s terms) from the US to help a bankrupt Britain after World War II. The war had devastated the British economy, which until then was still adapted to wartime production, and the loan was badly needed to procure capital equipment and consumer goods and to maintain British military presence throughout its still-vast empire. The strain of the negotiations -- the Americans driving a shockingly hard-nosed bargain -- contributed to the untimely death of an already-ailing Keynes even before he had turned 63.
The purveyors of “zombie apocalypse” scenarios, as a friend put it, are at it again. They take the most extreme and scariest scenarios and project these to keep change from happening. Don’t change. Keep the status quo. Otherwise, the zombies will come and get you.
July to September of any year is when we have the lowest local supply of rice. In the past, the National Food Authority (NFA) would have been ready with at least 30 days-worth of rice stock by July 1, most of which would be imported. The remaining 60 days of rice stock to be consumed by the population were expectedly held by households and the private commercial sector. That had been how we managed the seasonality of rice production to ensure our access to our food staple.
I am pleased to share with readers the political section of a primarily macroeconomic and financial quarterly report my colleague, Christine Tang, and I wrote last month for GlobalSource Partners (globalsourcepartners.com). GlobalSource Partners is a New York-based network of international analysts whose client subscribers are mostly international banks and asset managers.
Francis Galton, the great Charles Darwin’s half cousin, first noticed a curious fact in 1907: the average of the guesses of members of the crowd on the weight of an ox in the Plymouth country fair proved more accurate than the opinions of each selected recognized expert among the crowd. There is wisdom in the crowd. “Consensus forecasts” is one modern reincarnation; but now it is the average of a “crowd of experts.” The “Delphi method” goes further by using a crowd of experts who, in later rounds, are allowed to modify original predictions based on knowledge of results in earlier rounds with the expectation that the opinions will converge to the true value. The collective intelligence revealed by “social swarms” of networked players mediated by a collective intelligence platform follows the same logic in the digital space, and with surprisingly accurate predictions. The failures of collective rationality are, however, no less spectacular -- booms and busts in stock market, Tulipmania, Ponzi schemes, Benito Mussolini, Hugo Chavez.
We are so accustomed to using “growth” to refer to aggregate economic expansion that we forget it is really just a metaphor. It cannot be found in Adam Smith, who spoke instead of the “progress of opulence,” nor a century later even in Marshall who still used “progress” to mean the antithesis of poverty. Keynes used “growth” to denote increases in wealth or population -- a proper application to stock-concepts. Harrod may have been among the first to apply the term to the proportionate increase in aggregate income, perhaps illegitimately stretching the metaphor to cover a flow-concept as well. These days, of course, “economic growth” refers almost automatically to increases in measured income.
No surprise, TRAIN surfaced as an election issue: senators and congressmen who sponsored and voted for it are being unfairly though ineffectively targeted. Much of the conversation also missed the point that TRAIN is part of a larger national project designed to put our fiscal house in order coherently and comprehensively. This is an ambitious undertaking never attempted in past administrations where tax reform tended to be more piecemeal or driven by donor institutions like the IMF, or an actual or potential fiscal crises.
In liability law, who causes the injury pays. This is the cornerstone of the rule of law. In the case of the P1.134 billion penalty imposed on Manila Water (BusinessWorld, 25 April 2019), MWSS obligates the concessionaire to pay! But if the MWSS is itself the cause of the injury, we are standing the liability principle on its head.
Last week, BusinessWorld carried a report about a plan by Agriculture Secretary Piñol to limit meat imports due to high inventory of meats and meat products in cold-chain facilities in the country. In his words, he wants to broker a deal among meat importers and meat processors, on the one hand, and meat producers, on the other, for the amount of meat imports to be allowed into the country.
Observers have begun to worry that the country’s widening current-account deficits will sooner or later become a problem for continued growth. Between 2003 and 2015 the country ran a succession of surpluses but finally slipped into deficit beginning 2016 under the Duterte administration. Last year’s deficit exceeded all forecasts, coming in at 2.4% of GDP. On merchandise trade alone the deficit was close to 15% of GDP, a historically unprecedented figure.
Not many people may realize it, but there has been a bountiful harvest of legislation from the 17th Congress. Both Houses of Congress have produced significant economic and socially progressive legislation since signed into law by President Duterte. Credit no doubt goes to House Speaker Gloria Macapagal-Arroyo and Senate President Tito Sotto, both legislative veterans who know how to make their respective chambers productive.
THE leadership and the management of Manila Water squarely took responsibility for inability to provide 24-7 service in many parts of its concession area. And voluntarily waived fees in the several hundreds of millions, despite the absence of any such obligation under its concession agreement. Such act of corporate governance and responsibility is exemplary, and from my recall, unprecedented in the Philippines. Especially since, in the view of many, the fundamental shortcoming is not theirs, but government’s. More precisely, that of the MWSS in the last administration. Despite repeated warnings of the two concessionaires at that time, MWSS abysmally failed to develop a single water source, not a single stone was turned or a shovel lifted, even as they barred the concessionaires from developing such. The “original sin.”
It’s summer 2019 and the sun is beating down hard on the equator. Draught and dying crops are littering the Philippine landscape. Physical but especially mental activity is a hard slog. In the Serengeti Wildlife Reserve in Equatorial Africa, lion prides ignore prey to doze off in the shade for hours. The lions are not being lazy; they are just obeying the rule of efficient energy use. Under the harsh midday sun, the endotherms’ most energy-efficient posture is supine and asleep under the shade.
We mourn the passing of Governor Nesting Espenilla. A profound loss to his family and friends, to the BSP which has been his home since UP days and to our country and people. As a tribute to him and his work, I am sharing the introduction of an interview Christine Tang and I did for GlobalSource Partners (globalsourcepartners.com) in January 2018.